Monday, August 22, 2011

Gold, European Banks and You

The last two weeks have been extremely volatile on the financial markets.

It all feels like the speed wobbles. You remember as a kid on your bike, going too fast then feeling the wheels wobble violently before all went chaotic and you were left wondering how you ended up in such an uncompromising position gazing at the sun.

At the heart of this latest story line in the saga of our broken financial system, are the European banks. But all these stories are just the latest iteration of the fundamental problem. Debt.

In Europe it is all about trust. Just as it was after the Lehman's collapse in 2008, so it is now. Banks in Europe do not want to lend to each other as they do not trust each others capital positions. Not only has a lot of money been pulled out of the banking system over the last month (and into US Treasuries and gold), but European banks do not know who has what exposure to the sovereign debt market in Europe. Loans between these banks are drying up and interest rates rising on this risk. Even US money markets are extremely cautious to lend to European banks.

This is shining a light on the true positions of European bank balance sheets. The assets they thought they had (or deceived us in having) are near worthless.

You see when these banks purchased bonds from sovereign governments like Greece, Spain and Ireland, they treated them like gold. Yes, silly isn't it? They treated these bonds as completely risk free assets. They did not even set aside funds to back them up in case they went bad. However, these bonds are proving to not be worth the paper promises they were purchased for.

The consequences are huge. After all, whose money did they buy these bonds with? Yep, your money. That money in KiwiSaver or some world class investment fund. It may not be there now...gone.

The fear and uncertainty this is causing is reflected in the gold price soaring to all-time highs. Silver is now finally catching up. There will probably be a correction to the gold price soon. It is never 'different this time', big run-ups always correct. But that is healthy. Where will the price correct to? Maybe $1720 an ounce? Who knows. People like Dan Norcini are good at those sort of chart analysis.

Is gold too expensive? Have you left it too late to buy? Look at the fundamentals, don't look at the fear and don't be emotional about gold and silver. Do your homework (see the links on the right hand column on this page). Talk to people from both sides of the fence.

You already know what this blogger would say.

Gold in New Zealand dollars: $2290.08 per oz
Previous all time high: $2269.30 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $53.67 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001
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